The US markets ended lower for the second session yesterday on the back of mixed global cues and disturbing job loss data. Does this mean we’re still not out of the woods? Marc Faber, Editor and Publisher of the Gloom, Boom & Doom Report feels nothing has been solved in the US in the last 6-9 months and that a big economic crisis was still to be seen ahead. “The policy makers in the US, are still in-charge and if you look at what has happened in the US over the last 6-9 months, nothing has been solved. It has been postponed through fiscal and monetary measures, precisely the measures that brought about the crisis in the first place. So enjoy your ride in asset classes as long as it lasts but I think we are seeding the next crisis and it may happen in the next three months, maybe tomorrow, maybe five years, maybe only in 10 years but I think the big crisis is still ahead of us.” He said that the markets were overbought and that the economic news was still not good.
Here is a verbatim transcript of the exclusive interview with Marc Faber on CNBC-TV18. Also watch the accompanying video.
Q: There have been stray concerns on where the market might be headed, and whether things are approaching a bubble like proportion, especially in the equity market. What do you feel?
A: Basically, we have had huge fiscal stimulus packages and we had quantitative easing in basically all countries around the world. So asset prices have recovered strongly after March 6 this year, with stocks rising, commodity prices rising and the dollar weakening again and each time the dollar weakens it is kind of a symptom of some inflation in the system and excess liquidity building up. What we have is large cash positions around the world and zero interest rates and also the policy by the Fed to keep the matter very low level for a very long time as was the case of 2001. With this in mind, money goes out of cash balances into something, either consumption or into some kind of assets like equities or commodities or bonds or art or real estate.
Q. While the rally has been intact, there seems to be one concern which is that interest rates will soon start moving higher and that in turn will start sucking the liquidity out or the easy liquidity out. Is that a real fear for the market?
A: I don’t think so. I think we have to distinguish between short-term interest rates and long-term interest rates. Long-term interest rates, the Federal Reserve does not really control them in the long run. Temporary they can somewhat control them through quantitative easing and through the purchases of 10 year bonds, 7 year bonds, 30 year bonds but what they control are the short-term interest rates in other words, the Fed fund rates. Reading through the literature and through the speeches that are being given by Mr Ben Bernanke, my impression is that the short-term interest rates will stay long for a very long time. In America the fiscal deficit this year will be around USD 2 trillion and I do not think they can cut the fiscal deficit next year because if they cut it, it will have a negative impact on the economy. So I rather think that the fiscal deficit will stay at this level or in my opinion actually even increase. That will lead the Fed to keep interest rates artificially low because should they increase short-term rates meaningfully then the cost of servicing the government debt in the US will escalate substantially. So I think as far as the eye can see, monetary policies in the US will stay expansionary.
Q. Will talk about sectors and markets in specific in a bit but what about the dollar? There has been almost a straight line correlation between the way emerging markets have moved and the way the dollar has been weakening. Do you sense that is going to snap back soon?
A: If I look around the world — and this is frequently missed in the inflation-deflation debate — the US current account deficit, growing from USD 150 billion to USD 800 billion between 1998 and 2007 flushed the world with liquidity and led to essential inflation in emerging economies, in particular asset inflation. We now have flats in Hong Kong, in other words condominiums selling for up to USD 9000 a square feet. In America, price levels compared to the price levels in some of the Asian cities is actually now quite low. So I think that the US dollar is no longer overvalued for the time being and the sentiment about the US dollar is so negative that we could have a rebound in the dollar for a couple of months and that would indicate some tightening of global liquidity and be bad for asset markets as was the case in 2008 when the US dollar rebounded, all asset market went down.
Q: If there were to be a snap back, how powerful do you think it might be, are we talking about a big pullback for the dollar considering how much it sold off these past few months?
A: That I doubt because the Federal Reserve and the US government pursue policies that are not conducive to a strong US dollar. But as I said we are very oversold and could see some rebound, at maybe around 10% or so. But I would not expect the US dollar to be structurally a strong currency in the next few years, quite on the contrary I think the US dollar will continue to lose its purchasing power.
Q: While the correction has been called for many months now, do you see a situation over the next few months where the liquidity can actually push markets to far higher levels and see almost a blow out like rally over the next couple of months?
A: That I doubt; we are very overbought and the economic news is not particularly good. So I think that before we would rise much more in equity markets, a correction should actually take place. But markets are unpredictable and it is conceivable that there is a kind of a blow-off phase before we go down substantially. But I would not bet on that. I think the big move to grave this out, we are up 100% in India, we are up 50% in the United States, may be we go up another 10%, but we are not going to go another 100% straight away.
Q: As you watched the markets right now, do you see any similarities with the situation that we had in 2007 and just by extension of that if there is indeed a correction who do you think will falter a blink first, the equity markets or the commodities or a completely other asset class?
A: I think equities after the peak in October 2007 collapsed around the world by plus or minus 50% and now they have rebounded but they are not at their previous highs. In the meantime, in some countries, companies have continued to increase their earnings and so the valuations are not as stretched as in 2007. But what disturbs me personally is that we had the financial crisis. The cause of the financial crisis was excessive debt growth that was essentially produced by notably the American Central Bank, the Federal Reserve. Now the same people who produced the crisis namely the policy makers in the US, are still in-charge and if you look at what has happened in the US over the last 6-9 months, nothing has been solved. It has been postponed through fiscal and monetary measures, precisely the measures that brought about the crisis in the first place. So I think enjoy your ride in asset classes as long as it lasts but I think we are seeding the next crisis and it may happen in the next three months, maybe tomorrow, maybe five years, maybe only in 10 years but I think the big crisis is still ahead of us.
Q: Where does India fit in your preferred or not preferred list right now of markets?
A: I think the Reserve Bank of India (RBI) has one of the best monetary policies in the world because they supervise the financial sector very closely. They have maintained relatively tight monetary policies and also they pay attention not only to core inflation which is not representative of the cost of living increase and is not representative of inflation in the system but the RBI also pays attention to rising and falling asset prices. So I have to give them credit for being one of the best Central Banks in the world.
Source : MoneyControl
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